Even as the world’s economy has faltered, Sudan has continued to do surprisingly well. But recent falls in commodity prices have revealed serious structural imbalances. The question remains: has the Sudanese government undertaken enough reforms to make the country’s economic success sustainable?
According to statistics released earlier this year by the United Nations Department of Economic and Social Affairs (UNDESA), Sudan’s growth rate soared to 12.1% in 2006, well above the average for developing countries (7%). This growth rate may have fallen away slightly, on the back of a stagnating world economy, but Sudan still continues to outpace many in the developing world.
A recent survey of the world’s least developed countries (LDCs), published in July by the United Nations Conference on Trade and Development (UNCTAD), highlights the results of Sudan’s recent success. But the report also cautions that much of this success comes on the back of high global oil prices, and without structural reforms, is unlikely to be sustainable.
Unsustainable revenue streams
Junior Davis, one of the authors of the report, said, “Between 2005 and 2006, most LDCs achieved double growth, which was very encouraging for the world economy. But the concern is that such growth is not sustainable. Countries that have enjoyed such growth need to be investing in expanding their productive capacity and alleviating poverty. They need to diversify away from primary commodities and into other areas such as healthcare, education and training. But many are still not doing this.”
The UNCTAD report indicates that 78.8% of revenue from exported goods comes from fuel (principally oil) and 13.1% from agriculture — both sectors of the economy that are significantly prone to price fluctuations.
Espen Villanger, a research director at Norwegian-based policy centre CMI, is pessimistic about the outlook for Sudan. “The high growth rates that Sudan has seen recently would not have been possible without oil reserves,” he said. “Since Sudanese oil is expected to peak in 2012, there is a very narrow window for them to undertake the structural reforms that they need to undertake, and there are not many signs that they are seizing this opportunity.”
Oil prices have been rising steadily for a number of years, reaching a record high of $147.27 a barrel in July, but they have since fallen back. There is a good deal of conjecture about whether the current slippage in oil price is a temporary anomaly or the start of a wider trend.
“Markets have been hit by a double whammy of increased supply and creaking demand,” commented Mike Ritchie, an analyst at Energy Intelligence in the UK. “Some argue that the oil price slide is already coming to an end, while others believe there is further to fall as fundamentals recover a more prominent role in the psychology of the market.”
Sudan is not a member of the Organization of Petroleum Exporting Countries (OPEC), the cartel that regularly intervenes in the oil markets to fix the price, and thus has limited capacity for what it can do about this sudden drop. However, the annual energy outlook for 2008, published by the International Energy Agency (IEA), suggests that non-OPEC producers may enjoy greater influence in the future, as oil supply from OPEC members becomes increasingly pinched. The IEA advocates greater investment in the oil industries of non-OPEC countries, something that Sudan’s government is also keen to see.
The IEA also sides with those analysts that believe a return to high oil prices is probably not far off, as demand from developing countries offsets falling demand elsewhere. But even if oil prices do resume their upward trend, the current dip has highlighted how vulnerable oil-exporting nations are to the whims of the market.
Overreliance on oil is not the only difficulty that Sudan faces. Davis also said that LDCs should look carefully at reforming the agricultural sector, which often suffers from low labor productivity and is prone to fluctuations in the market. Davis would like to see workers migrate out of agriculture into what he terms the “rural non-farm economy.” For those that remain in agriculture, they should seek ways to tap into the regional or even international markets, rather than just produce goods for sale locally, Davis said.
Need for substantive improvements
However, Villanger cautioned that reform must be taken with care. He is particularly critical about a recent attempt to reform the Gezira Scheme in Sudan, an irrigation project that was started by the British in the 1920s to increase agricultural productivity. In 2005, the Sudanese government launched an initiative to encourage private investment into the Gezira region, which would release public funds for use elsewhere. “There have been no efforts to share more of the wealth,” says Villanger. “What you now have are big exporters from Saudi Arabia and elsewhere investing in the agricultural sector, with no signs of any real development in these sectors. The government is relying on foreign involvement, without taking steps to make the country more independent.”
Badr Eldin Suliman, a former finance minister and Sudan’s chief national negotiator to the World Trade Organization (WTO), strongly refutes suggestions that economic growth in the country is not sustainable. “The positive political economic conditions in Sudan will continue to drive the engine of growth,” he said. “Economic reform is getting deeper and wider in scope, sustaining the liberalization and in particular extending the role of the private sector.”
But he rejects claims that public funds are being diverted from the agricultural sector. “Major public investments are already targeting the declining irrigated farming sector infrastructure and these will continue,” Suliman said.
Suliman also suggested that a developing country such as Sudan may be able to weather the economic downturn better than others, since the country is not directly plugged into Western financial institutions such as the World Bank and the International Monetary Fund.
Sudan still holds out hopes of joining the WTO at some point in the future, but negotiations have been frustrated by those countries which are not yet willing to see the African nation admitted into their ranks. “Certain members are abusing the rules and pursuing sanctions as a tool of their foreign policy,” lamented Suliman.
Davis believes that there are a number of positive characteristics of the Sudanese economy, which could provide an opportunity to graduate from its status as an LDC — something that Botswana was able to do in 1994 and Cape Verde did in 2006.
In many LDC countries, domestic savings are extremely low, providing little capacity for dealing with shocks to the economy. This is not the case in Sudan, though. According to the UNCTAD report, only one third of LDCs had domestic savings above 15% of GDP — Sudan’s stands at 26%. Moreover, there is a concerted effort in some quarters to boost domestic savings.
Last year, the Bank of Sudan launched a microfinance unit in order to look at ways of providing cheap loans and finance to the nation’s poor. The unit is also looking at ways that microfinance can be used to encourage people throughout Sudan to save more.
“Micro-savings are not new,” said Ishraq Dirar, who heads the unit. “It is a deep-rooted culture in both rural and urban areas. Most of the poor use this to earn money for emergencies.”
But Davis cautioned that, to benefit the economy, savings must be reinvested wisely and is worried that Sudan may be overlooking this opportunity. “The main problem that LDCs have to deal with is how to raise their productivity,” he said. “They can do this by investing in appropriate infrastructure and diversifying their portfolio into social areas that improve labor productivity, such as health, education and training.”
Challenges of diversification
Davis accepts that diversifying away from their existing economic model is not an easy thing for countries to do or for politicians to accept, and usually requires government backing. He added that, in general, there has been greater political will in Asian LDCs than in African ones, with governments more willing to stump up public funds. “In those poorer countries where there is a high level of conflict or civil unrest, we have found that a lack of government involvement does become a problem,” Davis said.
For now, the Sudanese economy remains awash with capital, both from oil reserves and from foreign investment. Due to the political sensitivity of the industry, reliable oil statistics for Sudan are hard to come by, but the Bank of Sudan puts oil earnings in 2005 at $4.8 billion (a figure that Villanger is happy to quote). UNCTAD says that foreign direct investment (FDI), mainly from China, brought $3.5 billion to the country in 2006.
The danger, as Villanger sees things, is that too much of this money is drifting back into foreign hands and not being reinvested in sustainable growth. “This is a huge problem,” he said. “Here is a perfect opportunity to train the local population to take part in the growth, and foreign workers are benefitting all the time.”
Sudan’s minister of labor, Mohammed Yusuf Ahmed, was recently reported as complaining that it is too easy for foreign laborers to get permission to work in Sudan. He said that the checks to determine whether a person had the right to work in the country were often inadequate.
UNCTAD was established in 1964 to promote the integration of developing countries into the world economy. It publishes a report each year which considers how close the LDCs are from migrating out of poverty. UNCTAD recognizes 50 LDCs. Only two countries have so far graduated from LDC status: Botswana in 1994 and Cape Verde in 2004. Samoa may become the third country to graduate; a decision is expected on this small island by the end of the year. Countries who give up their LDC status often have to put up with a reduced level of foreign aid, although there is usually a transition period to allow the country to adjust.
Sudan’s future as an LDC is inevitably tied up with politics — not just because there is an absence of political will to address some of the fundamental problems with the Sudanese economy, but because a vast amount of the country’s oil wealth lies in disputed regions, where both the north and south stake a claim. In 2011, the South gets a chance to vote on whether to secede from the North and become an independent country. If it does, Sudan’s economy will certainly take a hit, as Khartoum moves to defend its mineral wealth.
